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SFDL > SEC Filings for SFDL > Form 10-Q on 13-Aug-2014All Recent SEC Filings

Show all filings for SECURITY FEDERAL CORP

Form 10-Q for SECURITY FEDERAL CORP


13-Aug-2014

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements and "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995

This report contains forward-looking statements, which can be identified by the use of words such as "believes," "intends," "expects," "anticipates," "estimates" or similar expressions. Forward-looking statements include, but are not limited to:
statements of our goals, intentions and expectations;

statements regarding our business plans, prospects, growth and operating strategies;

statements regarding the quality of our loan and investment portfolios; and

estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:
the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing assets in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our loan loss reserves;

changes in general economic conditions, either nationally or in our market areas;

changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;

fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas;

secondary market conditions for loans and our ability to sell loans in the secondary market;

results of examinations of the Company by the Federal Reserve, and our bank subsidiary by the FDIC and the South Carolina Board of Financial Institutions or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;

legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital, including changes as a result of Basel III, or other rules, and any changes in rules applicable to institutions participating in the U.S. Department of Treasury Community Development Capital Initiative or other rules;

our ability to attract and retain deposits;

increases in premiums for deposit insurance;

our ability to control operating costs and expenses;

our ability to implement our business strategies

the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

difficulties in reducing risks associated with the loans on our balance sheet;

staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;

computer systems on which we depend could fail or experience a security breach;

our ability to retain key members of our senior management team;

costs and effects of litigation, including settlements and judgments;

our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or we may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

increased competitive pressures among financial services companies;

changes in consumer spending, borrowing and savings habits;

the impact of new legislation, including the Jumpstart Out Business Startups Act and Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations;

the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;

our ability to pay dividends on our common and preferred stock;

adverse changes in the securities markets;


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

inability of key third-party providers to perform their obligations to us;

changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;

Future legislative changes and our ability to continue to comply with the requirements of the U.S. Department of Treasury's Community Development Capital Initiative; and

other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this document.

Some of these and other factors are discussed in the Company's 2013 Form 10-K under Item 1A, "Risk Factors." Such developments could have an adverse impact on our financial position and our results of operations.

Any of the forward-looking statements that we make in this quarterly report and in other public statements we make may turn out to be inaccurate as a result of our beliefs and assumptions we make in connection with the factors set forth above or because of other unidentified and unpredictable factors. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. These risks could cause our actual results for 2014 and beyond to differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect the Company's financial condition, liquidity and operating and stock price performance.

Financial Condition At June 30, 2014 and December 31, 2013

General - Total assets decreased $4,926,000 or 0.6% to $844.3 million at June 30, 2014 from $849.2 million at December 31, 2013. The primary reason for the decrease in total assets was a decrease of $12.3 million and $3.8 million in net loans receivable and other assets, respectively, offset partially by an increase of $5.8 million and $4.9 million in investment and mortgage- backed securities available for sale and cash and cash equivalents, respectively.

Assets - The increases and decreases in total assets were primarily concentrated in the following asset categories:

                                                                            Increase (Decrease)
                               June 30, 2014      December 31, 2013          Amount       Percent
Cash And Cash Equivalents  $      12,531,186   $         7,629,771      $   4,901,415      64.2%
Investment And Mortgage-
  Backed Securities -
  Available For Sale             436,810,833           431,003,452          5,807,381       1.3
Loans Receivable, Net            346,605,413           358,916,665        (12,311,252 )    (3.4)
Premise And Equipment, Net        18,485,846            17,243,390          1,242,456       7.2
Bank Owned Life Insurance         11,000,045            11,474,305           (474,260 )    (4.1)
Intangible Assets, Net                     -                11,970            (11,970 )   (100.0)
Other Assets                       3,709,901             7,547,528         (3,837,627 )    (50.8)

Cash and cash equivalents increased $4.9 million or 64.2% to $12.5 million at June 30, 2014 from $7.6 million at December 31, 2013. Investment and mortgage-backed securities available for sale increased $5.8 million or 1.3% to $436.8 million at June 30, 2014 from $431.0 million at December 31, 2013.

Loans receivable, net, decreased $12.3 million or 3.4% to $346.6 million at June 30, 2014 from $358.9 million at December 31, 2013. This decrease was a result of increased loan paydowns combined with lower loan demand from creditworthy borrowers. Residential real estate loans decreased $4.9 million or 5.9% to $78.1 million at June 30, 2014 from $83.0 million at December 31, 2013. Consumer loans decreased $1.7 million or 3.3% to $50.5 million at June 30, 2014 compared to $52.2 million at December 31, 2013. Commercial real estate loans decreased $9.0 million or 3.9% to $219.4 million at June 30, 2014 from $228.4 million at December 31, 2013.

Commercial business loans increased $1.2 million or 15.3% to $9.0 million at June 30, 2014 from $7.8 million at December 31, 2013. Loans held for sale increased $150,000 or 12.2% to $1.4 million at June 30, 2014 from $1.2 million at December 31, 2013.


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

Premises and equipment, net increased $1.2 million or 7.2% to $18.5 million at June 30, 2014 from $17.2 million at December 31, 2013. The Bank purchased land for $1.3 million during the six months ended June 30, 2014 for a prospective future branch site in Columbia County, Georgia.

Bank owned life insurance decreased $474,000 or 4.1% to $11.0 million at June 30, 2014 compared to $11.5 million at December 31, 2013. The Company redeemed $624,000 in life insurance during the period. This was offset slightly by income from bank owned life insurance totaling $150,000.

Other assets decreased $3.8 million or 50.8% to $3.7 million at June 30, 2014 compared to $7.5 million at December 31, 2013 as a result of deferred taxes related to increased unrealized gains in the investment portfolio.

Liabilities
Deposit Accounts - The balances, weighted average rates and increases and
decreases in deposit accounts were as follows:
                                                                                          Balance
                        June 30, 2014                  December 31, 2013            Increase (Decrease)
                   Balance      Weighted Rate       Balance      Weighted Rate      Amount        Percent
Demand
Accounts:
Checking      $ 144,210,745         0.03%     $  136,695,876         0.04%     $   7,514,869       5.50%
Money Market    232,990,758         0.19         240,631,708              0.28    (7,640,950 )    (3.18)
Statement
Savings
  Accounts       26,572,138         0.10          24,485,648         0.10          2,086,490       8.52
Total           403,773,641         0.13         401,813,232              0.19     1,960,409       0.49

Certificate
Accounts
0.00 - 1.99%    228,739,893                      226,750,180                       1,989,713       0.88
2.00 - 2.99%     24,916,434                       28,848,252                     (3,931,818)      (13.63)
3.00 - 3.99%        993,805                        1,285,108                       (291,303)      (22.67)
4.00 - 4.99%              -                                -                               -         -
5.00 - 5.99%              -                                -                               -         -
Total           254,650,132         0.78         256,883,540              0.83   (2,233,408)      (0.87)
Total         $ 658,423,773         0.38%     $  658,696,772         0.44%     $   (272,999)      (0.04)%
Deposits

Included in the certificate accounts above were $29.6 million and $25.6 million in brokered deposits at June 30, 2014 and December 31, 2013, respectively, with a weighted average interest rate of 1.05% and 1.23%, respectively.

Advances From FHLB - FHLB advances are summarized by contractual year of maturity and weighted average interest rate in the table below:

                                                                     Balance
                     June 30, 2014      December 31, 2013            Decrease
Fiscal Year Due:     Balance   Rate       Balance    Rate       Balance      Percent
2014             $ 22,252,312  1.43% $   34,840,058  1.64% $ (12,587,746)    (36.13)%
2015               15,000,000  4.01      15,000,000  4.01               -       -
2016               20,000,000  4.61      20,000,000  4.61               -       -
2017               12,900,000  4.38      12,900,000  4.38               -       -
2018                5,000,000  3.39       5,000,000  3.39               -       -
Thereafter                  -    -                -    -                -       -
Total Advances   $ 75,152,312  3.43% $   87,740,058  3.23% $ (12,587,746)    (14.35)%


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

Advances are secured by a blanket collateral agreement with the FHLB pledging the Bank's portfolio of residential first mortgage loans and investment securities with an amortized cost and fair value of $106.8 million and $103.6 million at June 30, 2014, respectively, and $111.6 million and $102.7 million at December 31, 2013, respectively. Advances are subject to prepayment penalties.

The following table shows at June 30, 2014 FHLB advances that are callable as of the dates indicated. These advances are also included in the above table. All callable advances are callable at the option of the FHLB. If an advance is called, the Bank has the option to pay off the advance without penalty, reborrow funds on different terms, or convert the advance to a three-month floating rate advance tied to LIBOR.

                                    As of June 30, 2014
Borrow Date   Maturity Date   Amount      Int. Rate    Type         Call Dates
                   11/23/15 $ 5,000,000      3.993 %   Multi-Call   5/23/08 and quarterly
   11/23/05                                                         thereafter
   07/11/06        07/11/16   5,000,000      4.800     Multi-Call   7/11/08 and quarterly
                                                                    thereafter
   11/29/06        11/29/16   5,000,000      4.025     Multi-Call   5/29/08 and quarterly
                                                                    thereafter
   05/24/07        05/24/17   7,900,000      4.375     Multi-Call   5/27/08 and quarterly
                                                                    thereafter
   07/25/07        07/25/17   5,000,000      4.396     Multi-Call   7/25/08 and quarterly
                                                                    thereafter

Other Borrowings - The Bank had $9.4 million and $8.0 million in other borrowings (non-FHLB advances) at June 30, 2014 and December 31, 2013, respectively. These borrowings consist of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts. The repurchase agreements typically mature within one to three days and the interest rate paid on these borrowings floats monthly with money market type rates. At both June 30, 2014 and December 31, 2013, the interest rate paid on the repurchase agreements was 0.15%. The Bank had pledged as collateral for these repurchase agreements investment and mortgage-backed securities with amortized costs and fair values of $15.8 million and $16.3 million, respectively, at June 30, 2014 and $14.8 million and $15.4 million, respectively, at December 31, 2013.

Junior Subordinated Debentures - On September 21, 2006, Security Federal Statutory Trust (the "Trust"), issued and sold fixed and floating rate capital securities of the Trust (the "Capital Securities"). The Trust used the net proceeds from the sale of the Capital Securities to purchase a like amount of junior subordinated debentures (the "Debentures") of the Company which are reported on the Consolidated Balance Sheets as junior subordinated debentures, generating proceeds of $5.0 million. The Company used the proceeds for general corporate purposes, primarily to provide capital to the Bank. The Capital Securities qualify as Tier 1 capital under Federal Reserve guidelines. The Debentures are the sole assets of the Trust. The Company's obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the Trust.

The Capital Securities accrue and pay distributions annually at a rate per annum equal to 1.93% at June 30, 2014. Prior to September 2011, one-half of the Capital Securities issued in the transaction had a fixed rate of 6.88% and the remaining half had a floating rate of three-month LIBOR plus 170 basis points. After September 2011, the fixed rate was converted to the floating rate, with all of the Capital Securities having a floating rate of three month LIBOR plus 170 basis points. The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears.

The Company has the right, subject to events of default, to defer payments of interest on the Capital Securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity date of December 15, 2036. The Company has no current intention to exercise its right to defer payments of interest on the Capital Securities.

The Capital Securities mature or are mandatorily redeemable upon maturity on December 15, 2036, or upon earlier optional redemption as provided in the indenture. The Company has the right to redeem the Capital Securities in whole or in part.

Convertible Debentures - Effective December 1, 2009, the Company issued $6.1 million in convertible senior debentures. The debentures will mature on December 1, 2029 and accrue interest at the rate of 8.0% per annum until maturity or earlier redemption or repayment. Interest on the debentures is payable on June 1 and December 1 of each year and commenced on June 1, 2010. The


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

debentures are convertible into the Company's common stock at a conversion price of $20 per share at the option of the holder at any time prior to maturity.

The debentures are redeemable, in whole or in part, at the option of the Company at any time on or after December 1, 2019, at a price equal to 100% of the principal amount of the debentures to be purchased plus any accrued and unpaid interest to, but excluding, the date of redemption. The debentures are unsecured general obligations of the Company ranking equal in right of payment to all of our present and future unsecured indebtedness that is not expressly subordinated.

Equity - Shareholders' equity increased $6.5 million or 8.3% to $84.5 million at June 30, 2014 from $78.0 million at December 31, 2013. Accumulated other comprehensive income, net of tax, comprised primarily of unrealized gains on securities available for sale, net of tax, increased $4.4 million or 935.0% to $4.9 million at June 30, 2014 from $472,000 at December 31, 2013. The Company's net income available for common shareholders was $2.6 million for the six months ended June 30, 2014, after payment of $220,000 in preferred stock dividends. The Board of Directors of the Company declared common stock dividends totaling $471,000 during the six months ended June 30, 2014. Book value per common share was $21.23 at June 30, 2014 and $19.02 at December 31, 2013.

Results of Operations for the Three Month Periods Ended June 30, 2014 and 2013

Net Income Available to Common Shareholders - Net income available to common shareholders increased $598,000 or 77.8% to $1.4 million or $0.44 per diluted common share for the three months ended June 30, 2014 compared to $769,000 or $0.26 per diluted common share for the three months ended June 30, 2013. The increase in net income available to common shareholders was primarily the result of an increase in net interest income combined with a decrease in the provision for loan losses. These factors were offset slightly by a decrease in non-interest income.

Net Interest Income - The net interest margin on a tax equivalent basis increased 27 basis points to 3.15% for the three months ended June 30, 2014 from 2.88% for the comparable period in 2013 as the decline in the average cost of interest-bearing liabilities outpaced the decline in the average balance of interest-earning assets. Net interest income increased $409,000 or 7.2% to $6.1 million during the three months ended June 30, 2014, compared to $5.7 million for the same period in 2013. During the three months ended June 30, 2014, average interest earning assets decreased $20.9 million or 2.6% to $794.7 million from $815.6 million for the same period in 2013. Average interest-bearing liabilities decreased $33.9 million or 4.6% to $705.2 million for the three months ended June 30, 2014 from $734.1 million for the comparable period in 2013.

Interest Income - Total tax equivalent interest income decreased $68,000 or 0.9% to $7.8 million during the three months ended June 30, 2014 compared to the same period in 2013. This decrease was primarily the result of the decrease in interest-earning assets, particularly loans. Total interest income on loans decreased $604,000 or 10.9% to $4.9 million during the three months ended June 30, 2014 from $5.5 million during the comparable period in 2013 as a result of the average loan portfolio balance decreasing $26.9 million or 7.1% to $354.6 million combined with the yield on the loan portfolio decreasing 24 basis point to 5.55%. Interest income from mortgage-backed securities increased $419,000 or 34.3% to $1.6 million as a result of a 60 basis point increase in the portfolio yield combined with a $7.0 million increase in the average balance. Tax equivalent interest income from investment securities increased $116,000 or 10.8% to $1.2 million as a result of an increase of 26 basis points in the yield combined with an increase of $16.4 million in the average balance of the investment securities portfolio.

The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the three months ended June 30, 2014 and 2013:


                 SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operations

                                                 Three Months Ended June 30,
                                  2014                              2013
                        Average Balance   Yield(1)        Average Balance    Yield(1)       Increase
                                                                                         (Decrease) In
                                                                                          Interest And
                                                                                            Dividend
                                                                                          Income From
                                                                                              2013
Loans Receivable, Net $     354,583,836      5.55 %   $      381,504,531        5.79 % $    (603,623)
Mortgage-Backed             256,386,601      2.56            249,395,337        1.96          418,745
Securities
Investment                  181,028,201      2.64            181,332,991        2.38          116,227
Securities(2)
Overnight Time And
  Certificates of
Deposit                       2,666,342      0.37              3,362,167        0.20              750
Total                 $     794,664,980      3.90 %   $      815,595,026        3.84 % $     (67,901)
Interest-Earning
Assets

(1) Annualized
(2) Tax equivalent basis is calculated using an effective tax rate of 34% and amounted to $119,706 and $144,839 for the quarters ended June 30, 2014 and 2013, respectively.

Interest Expense - Total interest expense decreased $452,000 or 23.1% to $1.5 million during the three months ended June 30, 2014 compared to $2.0 million for the same period in 2013. The decrease in total interest expense was attributable to decreases in interest rates paid and a $33.9 million decrease in the average balance of interest-bearing liabilities. Interest expense on deposits decreased $260,000 or 29.0% to $636,000 during the three months ended June 30, 2014 compared to $896,000 for the same period in 2013. The decrease was attributable to a 16 basis point decrease in the cost of deposit accounts combined with a $14.7 million decrease in average interest-bearing deposits to $607.2 million for the three months ended June 30, 2014 compared to $621.9 million for the three months ended June 30, 2013. The decrease was concentrated in the certificate accounts, which decreased $16.0 million or 5.8% to $258.9 million during the three months ended June 30, 2014 compared to $274.8 million for the same period in 2013. The Bank has been competing less aggressively for time deposits in its local area and focusing instead on core deposits, or non time deposits.

Interest expense on FHLB advances and other borrowings decreased $191,000 or 20.9% to $725,000 during the three months ended June 30, 2014 from $916,000 for the same period in 2013. The average balance of FHLB advances and other borrowed money decreased $19.2 million or 18.1% to $86.7 million during the three months ended June 30, 2014 from $105.9 million for the same period in 2013. The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the three months ended June 30, 2014 and 2013.

                                                    Three Months Ended June 30,
                                    2014                             2013
                                                                               Yield(1)       Decrease In
                                                                                           Interest Expense
                          Average Balance    Yield(1)       Average Balance                    From 2013
Now And Money Market   $
  Accounts                   321,842,988      0.16%     $      322,708,180      0.26%   $      (82,994 )
Statement Savings             26,478,968       0.10             24,356,240       0.16           (3,135 )
Accounts
Certificates Accounts        258,855,596       0.77            274,844,828       0.98         (173,831 )
FHLB Advances And
  Other Borrowed Money        86,734,189       3.34            105,920,679       3.46         (191,209 )
Junior Subordinated            5,155,000       1.95              5,155,000       2.00             (600 )
Debentures
Senior Convertible             6,084,000       8.00              6,084,000       8.00                -
. . .
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